By Ambrose Evans-Prichard
Worrying (click here) excesses are building up in the world's $US52 trillion ($74.2 trillion) nexus of shadow banking, and investors risk serious losses when the financial cycle turns, the ratings agency DBRS has warned.
The hunt for higher yield has led to a surge in leveraged loans, collateralised loan obligations (CLOs) and other -arcane high-risk instruments with echoes of the Lehman crisis.
While banks have been forced to raise their capital buffers and are deemed much safer than in 2008, the hazards have migrated to dark pockets of the vast non-bank sector. This now makes up 62 per cent of the $US97 trillion assets of the financial industry.
The sector lends directly for takeover bids and corporate activity much like the banking industry, but is not regulated as strictly....
...DBRS (click here) warned of "significant risk" in the changing character of US shadow banking - the world's biggest by far, still dwarfing China - and especially in leveraged lending. "The quality of these loans has deteriorated," it said....
...Leveraged lending is defined as loans to companies with a debt burden over four times cash flow....
...The Bank is also alarmed by the growth of closed-end funds, reaching $US30 trillion worldwide. These funds are often trapped in illiquid assets - it takes 297 days on average to sell commercial real estate - but they promise investors they can withdraw their money at any time. This creates a dangerous maturity mismatch....
...The pitfalls of this model have been on vivid display over recent days as -investors pulled more than €5bn ($8.1bn) from six funds run by H20 -Asset Management, triggered by a scare over links to a controversial German tycoon. The run on the Natixis-owned funds has since halted....
What is it with this administration and the shifting baseline of language? The last time there was a Goldman-Sachs US Treasury Secretary he was supposed to stop the decline in the markets that started in 2007. Now, there is another one and he wants to change the language to hide what he is doing.
November 9, 2017
By Pedro Nicolaci da Costa
This is a weird one: (click here) Treasury Secretary Steven Mnuchin, a former Goldman Sachs banker and hedge fund manager, wants to ban the widely used term "shadow banking."
First coined by the former Pimco economist Paul McCulley, the term refers to a wide swath of financial activities that occur at firms that are not commercial, deposit-taking banks. Because the behavior of such entities, which include hedge funds and private-equity firms, is bank-like but not overseen by bank regulators, many experts worry the sector could become the next candidate for a financial crisis now that rules on actual banks have been tightened....
Anyone at The Fed could update those that care.
